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February 28, 2012

Beware the Hype!

One of my clients recently sent me the link to a YouTube video and asked my opinion. This video was designed to sell an options education course and is an excellent example of the marketing hype that is all too common in the options education/coaching business.

The video is titled, “The Mysterious Vega Position”, and that certainly gets your attention. But what is mysterious about any options position? Options have been traded in growing volume since the Chicago Board Options Exchange opened in 1973. This firm would have you believe they have discovered something unknown to the thousands of professional traders over the past 38 years. The moderator of the video tells us that the “options gurus” claim that there is no “holy grail” in trading options, but they disagree. They would have you believe that they have discovered something new and mysterious. Let’s analyze that claim.

This firm claims that their “mysterious vega position” is “extremely rare” because it is “actually a positive vega as well as a negative vega strategy all at the same time”. This may be good marketing, but there is nothing mysterious about vega. It is a mathematical function; it is the first derivative of the Black Scholes equation with respect to volatility. Vega for a single option or a complex options position is always a specific number. It is never "both positive and negative" as claimed in this video. But vega does change while you are in a position, as do all of the Greeks. That is why options traders track the Greeks to monitor the changing risk of their position. The risk in our position isn’t static; it varies with fluctuations in price and volatility, as well as the passage of time.

Later in the video, the moderator shows a risk/reward curve for this “mysterious vega trade”, but tells us the actual options that make up the position are secret. Interestingly, he points out the vega of the position is -100. It isn't positive and negative, as he asserted earlier. It is a specific negative number. He does tell us that this is a modified iron condor position and that we condor traders “always have to do these adjustments that lock in losses”. Obviously, he just doesn’t know how to manage an iron condor position – adjustments do not have to lock in losses.

My best guess is that the “mysterious vega position” he presents is simply an iron condor with an ATM put added to the position. The video moderator is correct that this position will benefit from volatility declining (after all, the position vega is negative). And the position will also benefit from the volatility spike that will accompany a severe market crash. The ATM puts will spike in price due to both the price drop and the rising volatility. Thus, the position may increase in value with either an increase in volatility or a drop in volatility.

This video is a great example of the marketing hype that options traders must navigate through to find good and reasonably priced education. If this video had just showed us a condor with an additional put added at the beginning to hedge a downside move, we wouldn't have thought it was so mysterious. But if we think there is truly a secret here, then we may be tempted to pay the five thousand dollars for their course.

If you are interested in learning how to trade options without all of the marketing hype, consider the twelve-week Non-Directional Trading course I will be starting March 6. This course will focus on the development of options trading strategies that do not require you to predict where the market is going tomorrow. More importantly, you won’t be developing unrealistic expectations about options trading. It isn’t mysterious, but it does require hard work. Join us March 6.